1. 2/2008
The Saga of Rising Food Prices
Introduction
These factors, through their impact on the
The twenty first century is likely to witness
demand or supply side of food, have affected
an unprecedented escalation in food prices.
prices and availability. This study examines
This can be attributed to a sharp rise in the
such factors and the gains and losses they
demand for food due to rapid economic
generate for different national economies and
growth in many developing countries
individual actors within these economies,
accompanied by a decline in supply fuelled
including the impoverished. Next section
by climate change due to global warming
analyses the impact of change in the major
and the diversion of farm produce to the
determinants of food demand and supply.
manufacture of crude oil substituting
Following that predictive models of price
biofuels. This rise in prices will undoubtedly
change are looked at to identify the gainers
wreak havoc on the poor in developing
and losers from the recent change in the food
countries on either side of the threshold of
demand and supply situation, with specific
subsistence. To ward off this impending
emphasis on poverty and hunger. Finally,
doom, developing countries need to invest in
certain recommendations are made.
rural infrastructure and marketing
institutions and international organisations
need to support research in the area of Food Situation: Demand and Supply Side
agricultural science and technology. Factors
Developed nations should also be willing to As in all markets, prices in agriculture are
exploit their potential to augment global food determined by the relative strength of
supplies. demand and supply side factors. Incomes are
a very important factor as their increase leads
Since 2002, the simultaneous occurrence of to a rightward shift in the demand for
several phenomena has affected food agricultural products (DD to D ′D ′ - See Fig.
availability and prices. Many food-insecure
1) and a consequent increase in agricultural
countries in Asia and sub-Saharan Africa
prices. Such an increase in demand in the
have attained rapid and sustained growth
international market can also come about if
averaging more than 5 percent per annum
import dependent agricultural countries
without matching agricultural growth. Diet
suffer yield losses which cause domestic
globalisation has led to a shift in the
supply to contract. On the other hand,
composition of the food basket in favour of
agricultural prices in the international market
temperate vegetables, grains like wheat and
might also increase if supply falls i.e. the
wheat-based products. At the same time,
supply curve shifts leftwards from SS to S ′S ′ .
economic growth has resulted in an
This may happen due to two reasons: yields
increasing demand for energy. Due to a
falling, or crops being diverted to non-food
shortage of fossil fuels, agricultural products
use such as biofuels.
have been diverted for use as fuel. At the
same time, climate change brought about by
Assume initially that the demand curve and
global warming is affecting yields in tropical
supply curve are given by DD and SS, which
countries, thus escalating the scarcity of food
implies that the agricultural price is given by
supply.
the intersection of the two curves at p. Due
1
2. to the factors explained below, demand Demand Side Factors
increases to D ′D ′ and supply decreases to
As mentioned, many food-insecure countries
S ′S ′ ; the point of intersection of supply andhave experienced economic growth with the
demand curves now shifts to p ′ which is result that food demand and therefore food
higher than p. Moreover, the quantity bought deficits have increased. The items for which
on the international market shrinks from Q to demand has increased vary from country to
Q ′ which implies that developing countries country depending on tastes and existing
characterised by shrinking domestic supplies levels of affluence. For example, during
buy lower amounts even in the international 1990-2005, India witnessed an increase of
market – their aggregate consumption around 70 percent in the demand for oil
shrinks. crops and moderate increases of 20-30
percent in the demand for
Fig. 1: Interaction between Increasing Demand and cereals, meat, milk and
Shrinking Supply vegetables. In China, cereal
D′ S′ demand actually decreased
D
S by 20 percent in the same
Agricultural Price
period whereas demand for
oil crops, meat, fruits and
vegetables increased by
more than 140 percent
each. In Brazil, on the other
p′
hand, cereal and meat
consumption increased
p significantly while
consumption of fruits fell.
S′ D′ As evident from the study
D
of food consumption
S
bundles over this period,
Q′ Q Agricultural Quantity the positive thrust given to
food consumption under
various heads is stronger
We now look at the demand and supply side than the negative impact under other heads.
factors which can bring about such an
increase in agricultural prices.
Table 1: Direction of Food Consumption Change in Developing Countries, 1990-2005
Type India China Brazil Nigeria Kenya
Cereals - X √ - -
Oil Crops √ √ - - X
Meat √ √ √ - -
Milk √ √ √ √ -
Fruits √ √ X - -
Vegetables √ √ √ √ -
Note:√ denotes increase of 20 percent or above; X denotes decrease of 20 percent or above; - denotes
rest of the cases.
Source: Based on data from FAO (2007)i
2
3. Table 1 lists five developing countries majority of food items, which is presently
which together constitute around 40 percent the case, would drive up the value of land
of the world population. Consider the case and cause an increase in the prices of all
of the fast growers (countries with an annual food items.
rate of growth of per capita income
exceeding 3 percent): India and China. Only Supply Side Factors
one subcategory, that of cereals, shows
negative or insignificant (less than 20 Demand for Biofuels: Increasing demand for
percent) growth in consumption. If we crude oil coupled with an absence of
consider the rectangles formed by the increase in its supply in the international
intersection of crop types and countries as market has spurred an escalation in oil
individual data points, then in the case of prices. It is seen that when oil prices range
India and China, only 2 out of 12 data points from US$60 to US$70 per barrel, biofuels
(16 percent) imply insignificant positive become competitive with petroleum, even
growth or worse. If we club the fast growers with existing technologies. With the
with Brazil and Nigeria (moderate growers international price of oil currently exceeding
with an annual growth of per capita income US$100 a barrel, biofuels are more than
of around 1 percent) even then 7 out of 24 competitive with oil. This might result in
data points (less than 30 percent) imply the diversion of food grains and edible oil
insignificant positive growth or less. seeds to the production of biofuels rather
than to food markets. The corresponding
Addition of a poor performer like Kenya decrease in supply to these markets should
(slightly negative per capita income growth drive prices of food grains, feedstock and
during this period) to this group yields a oilseeds up, which in turn would increase
total of 13 such data points out of a grand the derived demand for land and push up the
total of 30 – less than 50 percent of price of all land based products.
“insignificant positive growth or worse”
cases. For individual sub-categories, With fossil fuels becoming scarce, it is
consumption of milk and vegetables show a possible that governments have started to
significant increase in 4 out of the 5 subsidise the production of biofuels, given
countries (except Kenya) whereas meat and that biofuels are associated with certain
oil crops show an increase in 3 and 2 cases positive environmental externalities. Such
respectively. subsidies also help to check the prices of
fossilised energy fuels by providing an
Note that all the mentioned food sub- alternative. For example, consider the
categories are derived from land either process of harvesting crops to produce
directly or indirectly. Direct land based biofuel for transport and other uses. The
products include fruits, vegetables, oil crops resultant emissions can subsequently be
and cereals while those based indirectly on captured by the next crop of plants,
land are meat and milk. In fact, the latter are constituting an input into biofuels, during
high-end products which are extremely land their growth cycle. In this way, it is
intensive as fodder input to meat/milk possible to recycle carbon –- a mechanism
conversion ratio is very high. With some which makes biofuels environmentally
developing countries experiencing rapid superior to fossil-based crude oil. However,
growth, consumption of these items has any subsidy, which is justified on these
gone up drastically. grounds, also implies that diversion of crops
for the production of biofuel becomes more
Summing up, it can be concluded that a attractive than supply to food markets. This
simultaneous increase in the demand for a in turn leads to an increase in the price of
3
4. food and thus, the subsidy for the import dependency of developing countries
production of biofuel effectively becomes a is bound to rise. The increase in demand for
tax on the poor who spend a large chunk of food from these countries in the
their income on food. international agricultural market coupled
With technology changing, two distinct with a fall in supplies by developed
developments with opposite consequences countries will result in an increase in the
are likely. The first enables better utilisation prices of agricultural items. A study by
of waste biomass which implies that Easterling et al (2007)iii predicts that global
tradeoffs between food and fuel warming resulting in temperature increases
consumption might be weakened and it of more than 3oCelcius may cause
would be possible to have more of both in agricultural prices to rise by up to 40
the future. However, second and third percent.
generation technologies for biofuel
production should be more efficient than The adverse impact of climate change on
first generation technologies. Consequently, crop yields can be checked by carbon
as the competitiveness of biofuel rises, there fertilisation (the beneficial effect of high
will be a tendency to divert more land, atmospheric concentrations of carbon
water and other resources to biofuel dioxide on crop yields). However, the
production. Thus, food prices will rise salutary effect of this on crop yield is not
further unless there is more food and entirely going to arrest its decline. As
agricultural science-related investment -- for mentioned earlier, with demand from
instance, in technologies that enable the developing countries rising, food prices will
production of more food with less land and continue to rise in the foreseeable future.
water. Such technological changes would
arrest the widening of the gap in
Models of Price Prediction: Distribution
competitiveness between biofuel and food
and Poverty Effects
and thus check the diversion of land to the
production of inputs for biofuel generation. The various models of price prediction are
summarised below. The IFPRI
Climate Change: The risk of climate change (International Food Policy Research
is likely to have a negative impact on food Institute) Impact Model shows that the
production. Rising temperatures will be forecasted price changes are extremely
associated with increased risks of floods and sensitive to the underlying assumptions of
droughts and, therefore, crop yield losses. A biofuel production. Consider a person who
study by Fisher et al (2005)ii reported that in earns US$100 a month. If he spends $50 on
more than 40 developing countries, mainly maize, the purchasing power of this US$50
in sub-Saharan Africa, predicted a 15 will be 36.5 percent [(1.72/1.26) -1)] higher
percent decline in cereal yields. Projections in the case of Scenario 1 as compared to
also show that land might become totally Scenario 2. Given that the person spends
unsuitable for wheat cultivation in Africa. half his income on maize, his total
Other estimates include large reductions in purchasing power corresponding to Scenario
yield of up to 22 percent in South Asia. 1 will be 18.25 percent higher than Scenario
2. Note that the results of both scenarios
Thus, global warming might lead to a 16 concur with the above-mentioned
percent decline in world agricultural GDP diagrammatic intuition – which predicts the
by 2080. This decline will be associated impending decline in the availability of
with a 20 percent decrease in the food.
agricultural output of developing countries
and a 6 percent decrease for developed ones. Other projections differ on details and
With yields and production diminishing, the forecasted magnitudes. For example, FAPRI
4
5. (Food and Agricultural Policy Research increase in farm gate prices will only be a
Institute), 2007iv predicts that corn and palm small fraction of the increase in retail prices.
oil prices will rise, but not wheat. EIU’s In many cases, falling yields would imply
(Economic Intelligence Unit) predictionsv lower production by net sellers and
(EIU, 2007) are no less forbidding – an 11 therefore, lower surplus for sale. With only
percent increase in the prices of food grains a negligible increase in prices at the farm
over the next two years actually gives a gate, the income of the net sellers (usually
higher trend rate of growth (5.4 percent per medium or large farmers) might well
annum) of food grain prices than that decline. This is not true in the case of net
corresponding to the 72 percent increase sellers from developed countries who
(4.6 percent per annum) by 2020 forecast by almost capture the entire benefit of an
Scenario II of IFPRI’s Impact model (See increase in retail price and therefore enjoy
Table 2). an increase in total revenues. Such increase
will also be facilitated by the fact that
All price prediction models show significant decline in yields due to global warming will
price increase in one or the other type of be relatively negligible in developed
agricultural product. It is obvious that an countries.
increase in cereal prices will impact all
countries – net cereal exporters will benefit As far as net buyers are concerned, the
and net cereal importers will find it more effect will be similar in developed and
costly to meet their demand. The incidence developing countries as higher prices would
of loss will be more common than gains – lead to a loss in purchasing power.
70 percent of the countries in the world are However, the percentage loss in purchasing
cereal importers. Rising prices imply that power will be higher for net buyers from
the shrinking food aid (2006 level was 40 developing countries as they spend a greater
percent lower than the 2000 level) has to be proportion of their income on food.
targeted to fewer countries, mainly in sub-
Saharan Africa and to only impoverished Thus, a larger chunk of population in the
groups within these countries. developing countries, particularly the poor
and net buyers of food, will have to bear the
The effect on individuals mirror the case of brunt of the price rise. This is true not only
countries – net sellers should gain and net of the urban poor who have no land but also
buyers should lose out. Here again, a the rural poor who are either landless
distinction has to be made between sellers at labourers or farmers with plots of land so
the farm, wholesale or retail level. In many small that even means of subsistence cannot
developing countries, agricultural markets be generated. For example, two thirds of
are segmented because of poor rural households in Java own between 0 and
infrastructure and long intermediary chains 0.25 hectares of land, which would make
are the only links between the farmers and them net buyers.
consumers. Given this state of affairs, the
5
6. Table 2: Price Prediction Models
Study Special Assumptions, if any Results
IFPRI Impact Model Scenario 1: Actual biofuel 26 percent price rise for maize,
expansion plans for countries 18 percent for oilseeds by 2020;
that have them and assumed net decrease in availability of
plans for countries that do not food and calorie consumption
Scenario 2: Double the 72 percent price rise for maize,
Scenario Levels 44 percent for oilseed by 2020;
net decrease in availability of
food and calorie consumption
FAPRI (Food and Agricultural No large impact on wheat prices
Policy Research Institute) Model, due to falling per capita demand;
2007 palm oil (biofuel feedstock)
prices to increase by 29 percent
by 2009-10; corn prices to also
increase till 2009-10
Economic Intelligence Unit, 2007 11 percent increase in the price of
grains in the next 2 years; 5
percent increase in the price of
oilseeds
OECD-FAO Outlookvi, 2007 Price of coarse grains, wheat and
(Organisation for Economic oilseeds to increase by 34, 20 and
Cooperation and Development, and 13 percent respectively by 2016-
United Nations Food and 17
Agriculture Organisation)
Statistically, the number of hungry in the A 2007 study by F. N. Tubiello and G.
world has been rising. FAO’s (United Fisherviii foresees a decline in the number of
Nations Food and Agriculture Organisation) undernourished people in different parts of
estimatesvii (FAO, 2006) suggest that the world. It states that in developing
between 1990 and 2004, the number of countries, the number of undernourished
undernourished rose by around 1 percent, will decrease from 885mn in 1990 to
i.e. from 823mn to 830mn, though their around 579mn in 2050 – a decline of
share in total population declined by three approximately 35 percent. However, this net
percentage points from 20 to 17 percent. change masks the prediction of an even
The number of ultra poor (those living on bigger net decline in developing Asia from
less than half a dollar a day) has actually 659mn to 123mn during the same time
increased in sub-Saharan Africa and Latin period (81 percent decline) and a rise in sub-
America. Saharan Africa from 138mn to 359mn (160
percent increase). Middle East and North
The Global Hunger Index (a weighted Africa will witness a milder increase of
average of the incidence of under around 70 percent – from 33mn to 55mn.
nourishment and low weight among There will be a gradual decline in Latin
children and the under-five mortality rate) America from 54mn to 40mn.
improved significantly in South and
Southeast Asia between 1990 and 2007 but Another point of concern is that in Asia the
not in the Middle East, North Africa and decline in the number of under-nourished
sub-Saharan Africa. Moreover, in recent will taper off – developing countries in this
years, measures to alleviate hunger have continent will have around 73mn under-
slowed down in countries like India and nourished people even in 2080. Latin
China but have accelerated in Brazil and America will see a slight acceleration in
Ghana. By lowering yields, climate change hunger alleviation between 2050 and 2080,
might negatively affect food security and with the number of hungry touching 23mn
reverse or slow down alleviation of hunger. by 2080. Another heartening feature is the
6
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